Saying the word "crypto" will get a visceral reaction in many circles, and if you say you still believe in the future of crypto, you have a high likelihood of being blacklisted.
I get it. It has been a tumultuous 16 months. In December 2021, the Bitcoin market cap was approximately $919 billion and today it is at approximately $550 billion. Then to top everything off, Three Arrows Capital, Voyager Digital, Celsius Network, FTX, BlockFi, and Silvergate Bank have toppled. There have been crypto casualties left and right, including me.
Rather than dive into the deep end of the crypto pool, I'm going to swim in the shallow end where there are massive opportunities to use blockchain technologies to solve real problems for financial institutions. I call the companies that are leveraging the blockchain to solve these problems "Web 2.5 companies," and there are two areas where we are already seeing results: identity verification and payments.
Digital Identity Verification and Management of Users
Currently, financial institutions must constantly verify user identity, store identity credentials, and adhere to security and compliance standards. At every point of this process, financial institutions are faced with high costs and users experience latency while onboarding, leading to frustration and customer churn.
Blockchain-based digital identity solutions have the power to replace traditional identification systems. With these solutions, customers go through the "know your customer" process one time and store their verified credentials on chain allowing financial institutions to verify an identity in two clicks. Financial institutions cut costs, minimize turnover, increase security, and, most importantly, provide a better user experience for their customers.
An example of a Web 2.5 company leveraging blockchain technology in the digital identity space is Portabl. Portabl integrates directly within a financial institution's platform to onboard and authenticate users. Portabl uses digital identifiers and verifiable credentials to document proof of a transaction on the blockchain and stores the encrypted data off chain. Portabl decreases the costs of onboarding new users and reverifying existing users, increases security through credentialing, allows for data ownership to reside with the users, and makes the onboarding process easy and painless.
While we have come a long way from paying in cash, the typical legacy payment flow on the existing infrastructure rails – such as ACH FedNow, card networks, and same-day electronic funds transfer systems (Fedwire and CHIPS) – is encumbered by multiple fees, slow speed, and centralized players who control the process, as illustrated below.
Source: Payment 101 series
Some companies are developing innovative solutions on existing payment rails. Orum, a payments orchestration company, routes money on whatever rail is best for a company's business, and Affirm Debit+ acts as a hybrid debit-credit card that allows customers to use the card for all their purchases to pay in full or through monthly installments.
However, Web 2.5 companies are tackling problems inherent in the existing infrastructure by enabling payment in crypto. One example is Flexa, a payment processing company that enables users to purchase goods and services with stablecoins. Flexa is focused on reducing costs, settlement time, and fraud. Merchants pay a 1% fee compared to the fee of 3% or more that credit card companies charge. Flexa's technology connects directly with a merchant's processing infrastructure, resulting in faster processing times and lower costs. Flexa is currently integrated with more than 40,000 partners and recently started working with Shopify.
Syro is solving the slow and expensive global payment and invoice management process by leveraging stablecoins to pay invoices, reduce transaction fees, and remove third-party intermediaries. Using Syro, a payment is processed in less than 5 seconds and costs around $.001. This system also sends, tracks, and confirms invoice and payment records. Syro's solution is built for non-native crypto customers by generating noncustodial wallets for users through a third-party provider.
The market drivers behind the Web 2.5 movement are changes in consumer and enterprise behavior, regulatory shifts, and market growth.
Consumer Adoption. The shift to self-sovereign identity verification through the blockchain allows users to own their data and control who has access. We are seeing this happen around the U.S. with more than 20 states collaborating with Apple to store their driver's licenses on their phones. And, with more companies – like Microsoft, PayPal, Overstock, Wholefoods, Newegg, Home Depot, Rakuten, Twitch, CheapAir.com, and AMC Theaters – accepting crypto payments, blockchain technologies provide the rails to enable fast, secure, lower-fee payment transactions.
Market Opportunity. Massive market growth in the digital identity verification space and in blockchain-based payment processes creates vast opportunities. By 2026, the market is projected to grow to $115 billion and $180.2 billion for digital identity and digital payments, respectively.
Regulatory Changes. Regulators are also starting to think differently about Web 2.5 innovations. The director of the Consumer Finance Protection Bureau, Rohit Chopra, indicated his support for open banking in his remarks at Money2020. Open banking initiatives around the world, especially in the U.K. and Europe, have resulted in decreased costs to access consumer data, decreased costs for consumers, and increased industry competition and consumer choice. I think the U.S. is next.
In January 2022, the Federal Reserve System released a report that considered how central bank digital currencies "fit into the U.S. money and payments landscape." The report pointed to stablecoins pegged to U.S. dollars as the predominant digital asset facilitating trades of other digital assets and viable means of payment. Similarly, the President's Working Group on Financial Markets recognized that well-designed and regulated stablecoins could provide faster, more efficient, and more inclusive payment options — all good things, in my opinion.
We are only at the tip of the iceberg regarding blockchain’s disruption to our economy. We are at the dawn of emerging payment rails, and we are just beginning to envision new methods of identity verification. These innovations are being triggered by increased consumer adoption, market opportunity, and regulatory changes. Let's start a conversation about other spaces that are ripe for disruption by leveraging blockchain technology.
Michelle Dhansinghani is deeply passionate about all things fintech and, especially, how blockchain technologies are disrupting the way financial institutions have traditionally conducted business. With experience at various venture capital firms and, most recently, at a web3 native crypto fund, Michelle sees tremendous opportunity in a future that leverages blockchain technologies.